Manipulation in the Gold Market

Today I want to comment on the “manipulation” of the gold and silver markets. I have been a long-time booster of GATA, LeMetropole Cafe and Ted Butler. I hold Ranting Andy Hoffman in the highest regard, in fact I so admire his passion and rants, I hired him to write for Miles Franklin and offered him the position of Director of Marketing. All of them share one thing in common. They all believe that the “Cartel,” a.k.a. the bullion banks, are behind the manipulation. They present an impressive volume of data to prove their point. Many of you have seen Ranting Andy’s charts, showing the “water-falI” drops at exactly 3 a.m. You have read about the ever repeating “plan A, B and C” that Bill Murphy discusses in every issue of the LeMetropole Café. If you follow the moving ball, it is hard to dismiss the premise that the precious metals markets are manipulated. In fact, Chris Powell, founder of GATA, states that, “There are NO free markets anymore.” All of them, including the stock market, the currency markets and the commodity markets are manipulated. I have been in his camp too from the onset in 2001.

The “Mainstream” press ridicules the “manipulation” thesis. Those who believe in market manipulation are in the minority, and are considered to have a “loose screw” or it is intimated that they are smoking something illegal. Well, I don’t think so. Many of the brightest folks I know believe in market manipulation. Even my friend, Trader David R believes in market manipulation – but not in the way that the other guys do. I know David very well and he is anything but off-the-wall and he does NOT have an agenda. He does have a heck of a resume. He has been a gold and silver trader for over 17 years. A very, very successful one at that. He worked for AIG, Barclays, and UBS, some of the biggest bullion desks in the world. He ran the precious metals trading department for First N.Y., one of the most successful hedge funds in New York and was in charge of a couple of dozen high-test traders and responsible for the department’s profits. He personally knows the gold and silver traders at JPMorgan and Goldman Sachs. He has contacts at the highest levels at the central bank of Russia and China, to mention but two. In a nutshell, he is well-connected, but works outside the system, on his own.

When I first brought up the topic of the central banks manipulating the price of gold, he flatly rejected the idea. Not to say that they didn’t lease gold and sell gold into the market – he knew that they did, but he maintained that it was not for “political” reasons. He pointed out that in the 90s, many of the older central bankers retired and a new breed of young inexperienced MBAs took over and they – unlike their predecessors – had no understanding of gold’s role as “Money.” They looked at all that gold, sitting in the vault, gathering dust and earning no interest, and decided to lease it out to earn a profit on the “asset.” No more or less than that! Well, my guys would disagree, and point to a statement by Alan Greenspan that “central banks stand ready to lease gold to support the dollar.” Perhaps at the very “top,” there was an agenda, but certainly not at the mid and lower levels. Still, David maintains that he would have known about it if there was manipulation. As an aside, of all the people whose views I have sent to him for comment, the one he has great respect for is Jim Sinclair!

The manipulation “camp” lays the blame on the bullion banks, especially JPMorgan. David says, “I strongly disagree with statements about banks manipulating the prices, as I would have seen it myself and most examples that I read, can be explained reasonably.”

When I brought up Ted Butler’s long-held accusations that JPMorgan is illegally shorting the market, his reply was:

Because I worked for 3 of the major bullion banks for 11 years and was in charge of the gold book and the hiring of 42 Brinks trucks to move our 27 million ounces of gold out of HSBC ‘s vault and into JPM vault when HSBC raised storage costs on us, I am 100% positive that it’s there….. I know we had 27 million ounces of gold on our daily balance sheet and the other big banks all had around the same amounts.

That’s why lease rates are way over USD rates; everyone has too much gold sitting in their vaults. I will be going to London in May, if you want to come along, I am sure I can get you a tour of a few of the major banks vaults (JPM included) and you can see for yourself ? I know that Paulson audited his GLD holdings on a Quarterly basis at the major banks vaults and never had any issue.

There is one aspect to Ted Butler’s argument – that JPMorgan is illegally manipulating the silver market – that is a fact. They control around 25% of all of the short positions on the COMEX and that heavy of a concentration is “illegal,” according to the commodity laws. Unfortunately, the CFTC has turned a blind eye to this massive “concentration.” Apart from silver, in any other commodity, a concentration of 5% would not be permitted. Go figure!

Ranting Andy strongly disagrees. If I want to get his blood boiling, all I have to do is bring up Trader Davie R’s name. The thing about Miles Franklin is we all have the freedom to speak our piece. I never tell Andy what he should write and he doesn’t tell me what I should write. But he does tell me not to even mention David R’s name to him, and so I don’t. Andy and I agree on most things, but this is an issue, in my mind, not yet resolved to my satisfaction. I’m still thinking it through. And so should you. I don’t want you to take anything as “absolute.” You should come to your own conclusions. We try, Andy Hoffman and me, to provide you with a lot of very good information but we expect you to decide for yourself if it makes sense.

Remember, David R. is not stating that there is no manipulation of the markets. He is simply saying that it is not the bullion banks that are manipulating the prices and that there is no “political” agenda to the manipulation. It is strictly profit-motivated and the source is a “Wall of Money” that is way beyond the resources of the banks. He wishes that the mega hedge funds with their algos would be banned from trading.

From my point of view, I don’t much care – either way. Yes, I am certain that there is manipulation and what that implies is that the bull market in gold and silver will go on for a longer time than if the manipulation didn’t exist. I don’t want to see the bull market come to an end anytime soon, and as long as the manipulation continues, it will drag out the bull market, which is good for business and my portfolio, as it allows me even more time to accumulate more precious metals.

Here are two recent Emails from Trader David R; you can make up your own mind on this issue. I am giving you an alternative explanation for the unusual market activity and volatility.

Hi David,

The problem with this old argument is that it’s getting OLD ! The bankers do not run the market now, it’s run by the Algo’s and the machines, which are controlled by “The Wall of Money”. The market has become much bigger these days, with more investment products and instruments. The bankers are now a small part of this market. The head gold trader was just let go at JPM. He was there for 13 years, but since there has been such a decline in business at the banks, they are starting to reduce staff. What will GATA think of next….. well they better start thinking because they are losing even more credibility continuing to argue that the Bank Cartel is behind these moves. People involved in this market know that the banks are just on the sidelines….. this market is much bigger than you or I can imagine.

______________________________________________

Hi David,

As you know I have been trading this market for 17 years now and have worked for AIG, Barclays, and UBS. Some of the biggest bullion desks in the world….. I strongly disagree with statements about banks manipulating the prices, as I would have seen it myself and most examples that I read, can be explained reasonably. The one thing I do agree with are that the Algo’s are running these markets now. There is much bigger money at play now and it’s HOT money that comes in and out, they try to make money pushing all markets around. And the timing thing, yes it’s based off of orders that come into the market by Index funds, ETFs and other products. The gold market is very small notionally and this HOT money has made the market more volatile. I would hope that the government would outlaw these guys from participating, as it does make the market more difficult to trade at times, but to state that there is a bigger conspiracy, is just nonsense. Writing stuff like this keeps people employed and eager to prove me wrong…. I have yet to see any strong evidence to change my mind. But please continue to send me as I do enjoy a good laugh from time to time !

Rest assured, I read the whole thing and wrote about it this morning, pulling key quotes such as:

The authority of the President.to require acceptance and priority

performance of contracts.to promote the national defense over performance of any other contracts or orders, and to allocate materials, services, and facilities as deemed necessary or appropriate to promote the national defense, is delegated to the following agency heads:

(3) the Secretary of Health and Human Services with respect to health resources;

(4) the Secretary of Transportation with respect to all forms of civil transportation;

(5) the Secretary of Defense with respect to water resources; and

(6) the Secretary of Commerce with respect to all other materials, services, and facilities, including construction materials.

The Secretary of each agency delegated authority under subsection (a) of this section (resource departments) shall plan for and issue regulations to prioritize and allocate resources and establish standards and procedures by which the authority shall be used to promote the national defense, under both emergency and non-emergency conditions.

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